Quanta Services, Inc. (PWR) Q3 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Quanta Services Third Quarter 2012 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded today, Wednesday, October 31, 2012. And I would now like to turn the conference over to Mr. Kip Rupp, Vice President, Investor Relations. Please go ahead.

Great. Thank you, Luke, and welcome, everyone, to the Quanta Services conference call to review third quarter 2012 results. Before I turn the call over to management, I have the normal housekeeping details to run through. If you would like to have Quanta news releases and other information e-mailed to you when they occur, please sign up for e-mail information alerts by going to the Investors & Media section of Quanta Services' website at quantaservices.com. A replay of today's call will be available on Quanta's website at quantaservices.com. In addition, a telephonic recorded instant replay will be available for the next 7 days, 24 hours a day. That can be accessed as set forth in the press release. Please remember that information reported on this call speaks only as of today, October 31, 2012, and therefore, you are advised that any time-sensitive information may no longer be accurate as of the time of any replay of this call. This conference call will include forward-looking statements intended to qualify under the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements include all statements reflecting Quanta's expectations, intentions, assumptions or beliefs about future events or performance or that do not solely relate to historical or current facts. Forward-looking statements involve certain risks, uncertainties and assumptions that are difficult to predict or are beyond Quanta's control, and actual results may differ materially from those expected or implied as forward-looking statements. Management cautions that you should not place undue reliance on Quanta's forward-looking statements, and Quanta does not undertake any obligation to update any forward-looking statements to reflect events or circumstances after this call. For additional information concerning some of the risks, uncertainties and assumptions that could affect Quanta's forward-looking statements, please refer to the company's annual report on Form 10-K for the year ended December 31, 2011; its quarterly reports on Form 10-Q and; its other documents filed with the Securities and Exchange Commission, which may be obtained on Quanta's website or through the SEC's website at sec.gov. With that, I would now like to turn the call over to Mr. Jim O'Neil, Quanta's President and CEO. Jim?

Good morning, everyone, and welcome to Quanta Services third quarter 2012 earnings conference call. Before I begin the call, on behalf of the Quanta management team, we would like to express our concerns to our friends, analysts and shareholders that may have been impacted by Hurricane Sandy, many of whom may not be able to participate on the call today. You are in our thoughts and prayers. After my operational overview, I will turn the call over to Derrick Jensen, Quanta's Chief Financial Officer, who will provide a detailed review of our third quarter financial results. Following Derrick's comments, we welcome your questions. We continue to see market momentum in our infrastructure segments, particularly our electric transmission and pipeline services. In addition, because of the many nuances in building major infrastructure projects in today's challenging environment, our customers have become more selective in choosing a construction partner that can successfully manage safety and environmental concerns, project timelines and execution while meeting budget expectations. Our third quarter performance reflects our customers' continued confidence in our ability to exceed expectations with consistent, safe and efficient execution. We are also -- we also expect strong demand for our services in the future from a broadening customer base as our infrastructure projects move forward. Our revenues in the third quarter were a record $1.69 billion, a 35% increase compared to the third quarter of 2011, and revenues for the first 9 months of this year have increased almost 49% compared to the same period last year. Our 12-month backlog is at record levels. Our employee count at the end of this year's third quarter was approximately 21,000, up 21% compared to the third quarter of last year and up 20% since the end of 2011. Although emergency restoration service revenues were $81 million for the quarter, the highest quarterly level since Hurricane Rita hit the Gulf Coast in the third quarter of 2008, the quarter-over-quarter increase of $16 million was negligible relative to the overall revenue growth in the quarter. Our third quarter results were primarily driven by a strong performance in our Electric Power segment due to the significant volume of electric transmission projects underway and our ability to safely execute those projects. Improved performance quarter-over-quarter and sequentially from our Natural Gas and Pipeline and Telecommunications segments also contributed to the strong results. Our Electric Power segment revenues continue to reflect significant growth, and 12-month backlog grew due to new contract awards. During the third quarter, Quanta was selected for 3 large electric transmission projects which have an aggregate value of approximately $400 million. We secured a contract from ATCO Electric to install transmission infrastructure for their Hanna Region Transmission Development Project in Southeast Alberta, Canada. This project is in the early stages of construction and is expected to be completed in 2013. Southern California Edison or SCE selected Quanta to install transmission infrastructure for SCE's Eldorado-Ivanpah Transmission Project. This project is in construction, with completion estimated by July of 2013. In addition, SCE selected Quanta to construct its Red Bluff Substation Project, which also includes the installation of 2 parallel transmission line segments in eastern Riverside County California. This project is in construction and is expected to be completed by the end of 2013. Quanta was also selected by American Electric Power or AEP to rebuild 66 miles of its 345-kilovolt line near Corpus Christi, Texas. We will perform this work while the line is in an energized state utilizing proprietary energized services capabilities and equipment to avoid service outages to AEP's customers during construction. This project is the first of 5 phases of energized transmission upgrades AEP has planned in this area which are projected for completion by March of 2016. Once completed, this first phase will represent the longest transmission line in the United States rebuilt in an energized state. And we believe we are well-positioned to be awarded the remaining 4 phases of this project. Our proprietary Energized Services strategically differentiate Quanta from others, enabling us to provide solutions to utilities that minimize disruption to their customers when upgrading or replacing electrical infrastructure. Last month, a Federal court entered an order finding that a product line sold by another company infringed on the United States patent for our LineMaster Robotic Arm. We will continue to be diligent in defending our proprietary technologies and work methods. The outlook for electric transmission spending remains strong. We continue to see a significant amount of additional new, large transmission program opportunities that we expect to be awarded over the next 12 months. In addition, smaller transmission project activity, which represents approximately 50% of our overall transmission revenues, is significant as our customers upgrade existing transmission infrastructure to comply with NERC reliability standards. Our electric distribution revenues continue to grow at near double-digit rates through the first 9 months of this year compared to the same period last year despite political and economic uncertainty. Pockets of distribution activity are being spurred by a pick-up in new home construction, but the primary driver of distribution activity continues to be reliability initiatives. Our Renewables revenues increased approximately 104% to $306 million during the first 9 months of this year compared to the same period of last year, as we continued to build utility scale solar projects primarily in the Western United States. We have an active pipeline of utility scale solar opportunities that we anticipate will be awarded and move into construction in 2013. Over the past week, we have deployed significant resources to 9 states and the District of Columbia for 8 utility customers to restore electrical infrastructure damaged by Hurricane Sandy. A storm like Sandy will obviously generate emergency restoration revenues for Quanta, however, these revenues are not all incremental. Our employees who are responding from points throughout the United States and Canada have been released from noncritical work where they were generating revenues to respond to this storm event. Additionally, we have pipeline construction projects in the Marcellus, several large electric transmission construction projects in the Northeast and our Fiber Optic Licensing business in Philadelphia that may be negatively impacted by Hurricane Sandy. As a result, it is too early to determine the extent to which Hurricane Sandy will affect our financial performance this quarter, and our fourth quarter guidance does not take into account any positive or negative impacts from the storm. Turning to our Natural Gas and Pipeline segment, revenues increased substantially compared to the same quarter last year and more importantly, operating income continues to improve. The strategic shift of this segment over the past 18 months to capitalize on shale infrastructure opportunities, as well as better project execution, is driving this improved profitability. We expect this segment to remain profitable for the remainder of the year and for 2013. Demand for our pipeline shale gathering services is active and steady as the lack of gathering infrastructure in many of the shales remains a challenge for producers to transport product to market and processing areas. Most of our shale gathering work is being performed in the Marcellus, Bakken and Eagle Ford Shales. We believe demand for the shale gathering infrastructure will remain robust for the foreseeable future and that development of new shales in the future will create additional opportunities for Quanta over the next several years. We continue to see signs that a significant volume of long-haul, large diameter pipeline projects could be awarded over the next several quarters and move into construction toward the middle of 2013. A significant increase in the long-haul pipeline market, coupled with continued demand for shale gathering pipeline construction resources, could result in a significant tightening of industry capacity. A number of long-haul pipeline construction companies have moved pipeline construction resources into the shales to perform pipeline gathering work, and we do not believe all of these spread resources will return to the long-haul market. We have been taking strategic steps to ensure we are in position to capitalize on the return of the long-haul pipeline market when it occurs while maintaining pipeline construction resources in the shales to help our customers develop pipeline-gathering infrastructure. We will continue to gain more clarity on the progress of long haul projects and the industry dynamics over the next few quarters. We are optimistic that long-haul pipeline market conditions should improve in 2013 and 2014. Our Telecommunications segment experienced solid growth in the third quarter. Revenues increased almost 21% in the third quarter compared to the same period last year, driven by increases in the pace of construction on broadband stimulus projects in fiber-to-the-cell site initiatives. Our 12-month backlog increased in the quarter, while total backlog decreased slightly due to backlog burn associated with the significant increase in projects under construction during this year's third quarter, as well as the expiration of several multiyear master service agreements at the end of this year that we are optimistic will renew before year-end. We expect broadband stimulus projects to continue through the rest of this year and well into 2013 and expect sustained high levels of fiber-to-the-cell site activity through 2013. The reallocation of funds within the Universal Services Fund to develop and operate the broadband networks in underserved areas of the country should also have a positive impact on our business. This program funding reallocation is in the early stages of deployment, and we anticipate that our Telecom segment will begin to experience the benefits of it in the latter part of 2013 or 2014. In our Fiber Optic Licensing segment, revenues for the quarter were slightly up compared to the third quarter of last year. This segment continues to provide a steadily growing revenue and earnings profile with attractive margins and returns. Our contract sales for this segment for the first 9 months of the year have increased at a healthy double-digit growth rate, which indicates that the segment revenue growth is likely to accelerate next year. We are increasing our full year outlook to reflect our strong results for the first 9 months of 2012, the expectation of continued strength in all of our segments for the remainder of this year, and better visibility in our Natural Gas and Pipeline segment. Derrick will provide additional detail about our outlook during his comments. In summary, the demand for the services Quanta provides is substantial. All of our operating segments are executing well, and total company backlog remains strong. Based on the work we have in hand today, the opportunities we believe could materialize over the next year and our confidence in continued solid execution, we believe all of our operating segments will have a solid finish to 2012, and we look forward to a strong 2013. I will now turn the call over to Derrick Jensen, our CFO, for his financial review of the third quarter. Derrick?

Thanks, Jim, and good morning, everyone. Today, we announced revenues of $1.69 billion for the third quarter of 2012 compared to $1.25 billion in the prior year's third quarter, reflecting growth of about 35% quarter-over-quarter. Net income attributable to common stock for the quarter was $96.4 million or $0.45 per diluted share as compared to net income of $52 million or $0.25 per diluted share in the third quarter of last year. Included in net income attributable to common stock for the third quarter of 2012 is $7.1 million of income or net benefit of $0.03 per diluted share, primarily from the release of income tax contingencies associated with the expiration of certain statutory periods that are no longer subject to audit. The growth in consolidated revenues in the third quarter of 2012 was driven by growth across all of Quanta's segments, as well as the incremental contribution of approximately $62 million in revenues from companies acquired since the third quarter of last year. Excluding the impact of revenues from acquired companies, organic growth for the quarter was 31%. Our consolidated gross margin increased to 16.6% in the third quarter of 2012 from 15.6% in 3Q '11. This increase was due to strong performance in each of our segments, as well as the impact of higher revenues, which improved our ability to cover fixed operating costs. Selling, general and administrative expenses were $124.3 million, reflecting the increase of $31.9 million as compared to last year's third quarter. This increase is primarily due to $16.7 million on higher salary and incentive compensation costs associated with increased levels of activity and profitability; approximately $5.1 million in increased professional fees, primarily associated with ongoing technology development costs, business development initiatives and legal matters; and $4.6 million in additional administrative expenses associated with recently acquired companies. As a percentage of revenues, selling, general and administrative expenses remained flat at 7.4% for the third quarter of 2012 and 2011. Our consolidated operating margins before amortization expense increased from 8.2% in 3Q '11 to 9.3% in 3Q '12. Amortization of intangible assets increased from $8.3 million in 3Q '11 to $10.5 million in the third quarter of 2012 due to acquisitions at the end of 2011 and the first and second quarters of 2012. To further discuss our segment results, the Electric Power segment's revenues were up about $266.6 million quarter-over-quarter or approximately 32%. Revenues were positively impacted by higher revenues from Electric Power transmission services, resulting from an increase in number and size of projects that were ongoing in 3Q '12 compared to 3Q '11, as well as increased renewables revenues. The increase in revenues is also attributable in part to the incremental contribution of $53 million in segment revenues from acquired companies and an increase of $13 million in emergency restoration services versus 3Q '11. Growth in this segment without revenues from acquired companies was still 27%. At the end of the third quarter, 12-month backlog for the Electric Power segment increased 23%, and total backlog for this segment decreased slightly by 1% compared to the third quarter of 2011. Operating margin in the Electric Power segment increased to 12.5% in the third quarter of 2012 compared to 12.2% in last year's third quarter, primarily due to the increased volume of revenues from services on higher-margin transmission projects. Also contributing to the increase was the increase in emergency restoration service revenues which typically carry higher margins. Natural Gas and Pipeline revenues increased quarter-over-quarter by 53% to $397.5 million in 3Q '12, primarily due to an increase in the number of shale gathering system projects currently under construction. Additionally, we saw increases in revenues from natural gas distribution services as the outsourced gas distribution work for Puget Sound Energy was just starting up in the third quarter of 2011. At the end of the third quarter of 2012, 12-month and total backlog for this segment increased about 26% and 11%, respectively, compared to the end of the third quarter of 2011. Operating income for the Natural Gas and Pipeline segment as a percentage of revenues increased to 5.8% for 3Q '12 from a negative 1.6% for 3Q '11, due primarily to the impact that lower revenues earned in the prior year and on this segment's ability to cover fixed operating and overhead costs as our efforts to move into shale gathering system projects had just begun in the third quarter of 2011. Current year was positively impacted by the overall increase in the volume of this segment's revenues due to the shift to more shale gathering system projects. Revenues from our Telecommunications segment increased $29.2 million or 21% to $169.9 million in 3Q '12, primarily due to an increase in the volume of work associated with stimulus-funded fiber optic network projects and higher revenues from fiber-to-cell site and wireless initiatives, resulting from higher capital spending by our customers. Compared to the end of last year's third quarter, 12-month backlog for the segment increased 6%, and total backlog decreased about 2%. Operating margin in the Telecommunications segment was 13.1% in 3Q '12 compared to 11.3% in 3Q '11. This increase in margin is primarily due to increased demand for our services, allowing for margin expansion, as well as the impact of revenue increases on this segment's ability to cover fixed and overhead costs. Fiber Optic Licensing segment revenues were $28.6 million, and operating margin was 49.2% in 3Q '12, which are both comparable to the third quarter of 2011. Capital expenditures for this segment have increased this year versus last year, which should drive revenue and backlog growth as network capacities license out to customers in 2013. When calculating operating margins by segment, we do not allocate certain selling, general and administrative expenses and amortization expense to our segments. Therefore, a previous discussion about operating margins by segment excludes the effects of such expenses. Corporate and unallocated costs increased $18 million in the third quarter of 2012 as compared to 3Q '11, primarily as a result of $11 million in higher salary and incentive compensation costs associated with current levels of operating activity and $2.2 million in higher amortization expense associated with intangible assets. Adjusted diluted earnings per share as calculated in today's press release were $0.48 for the third quarter of 2012 compared to an adjusted diluted earnings per share of $0.29 for 3Q '11. Cash flow used in operations was approximately $61.3 million for the third quarter of 2012. Capital expenditures, net of proceeds from equipment sales, were about $68.7 million, resulting in approximately $130 million in negative free cash flow for the quarter. Days sales outstanding or DSOs were 91 days at September 30, 2012 versus 75 days at September 30, 2011 and 81 days at June 30, 2012. Cash flow for the quarter was primarily impacted by increases in receivables. DSOs have increased compared to September 30, 2011 and June 30, 2012 as a result of the overall increase in Quanta's net position with its customers, which is driven by significant revenue increases on the select number of large electric transmission projects which went into construction starting this quarter. These jobs contributed approximately 5 days to Quanta's consolidated DSO calculation as of September 30, 2012. In addition, the significant storm work I spoke of earlier remains uncollected due to the timing of when the work was performed in the quarter. Lastly, although we have invoiced the customer for the change orders associated with the Sunrise project, the change orders have not yet been settled due to the substantial volume of underlying support records that are being reviewed by the customer. These change orders remain and cost in excess of billings [ph] and contribute to the overall higher DSO. Detailed discussions and reviews continue with the customer, and we are currently aren't aware of any circumstances warranting any adjustments to the amounts invoiced, although the timing of the settlement could significantly impact our overall free cash flow for the year. EBITA for the quarter of 2012 was $152.8 million or 9.1% of revenues compared to $98.1 million or 7.8% of revenues for the third quarter of 2011. Adjusted EBITDA was $193.7 million or 11.5% of revenues for the third quarter of 2012 compared to $133 million or 10.6% of revenues for the third quarter of 2011. Calculation of the EBITA and EBITDA and adjusted EBITDA, all non-GAAP measures and the definitions of these and DSOs, can be found in Investors & Media section of our website at quantaservices.com. At September 30, 2012, we had about $179 million in letters of credit outstanding primarily to secure our insurance program and we had borrowings of approximately $125 million outstanding under our credit facility. In addition, at the end of the quarter, we had approximately $128 million in cash predominantly within foreign operations. Considering our cash on hand and availability under our credit facility, we had nearly $524 million of total liquidity as of September 30. Turning to our outlook for 2012, we expect revenues for the fourth quarter of 2012 to range between $1.55 billion and $1.65 billion and diluted earnings per share to be $0.37 to $0.39 on a GAAP basis. Included in our estimate of GAAP diluted earnings per share for the fourth quarter of 2012 is a net tax benefit of approximately $0.02 per share associated with certain tax contingency releases due to the expiration of certain statutes of limitations during the fourth quarter. These estimates compare to revenues of $1.51 billion and diluted earnings per share of $0.32 in GAAP EPS in 4Q '11. GAAP EPS forecast for 4Q '12 includes an estimate of $6.9 million for noncash compensation expenses and $9.1 million for amortization expenses. Including these expenses and the previously discussed net tax benefit, our non-GAAP adjusted diluted earnings per share for the fourth quarter are expected to be $0.40 to $0.42, and compare to non-GAAP adjusted diluted earnings per share of $0.41 in 4Q '11. This non-GAAP measure is calculated on the same basis as the historical calculations of adjusted diluted earnings per share presented in the release. We are currently forecasting net income attributable to noncontrolling interest to be approximately $3 million to $3.5 million in the fourth quarter of 2012 and around $16 million to $16.5 million for the year. For additional guidance, we are currently projecting our GAAP tax rate to be around 34% for the fourth quarter of 2012. The lower tax rate for the fourth quarter is primarily due to the additional tax contingency releases I previously discussed. We expect our diluted share count to be about 213 million shares for 2012. We expect CapEx for all of 2012 to be approximately $215 million to $225 million, which includes CapEx for our Fiber Optic Licensing segment of about $45 million. This compares to CapEx for all of 2011 of $172 million. As Jim commented, we continue to execute within all of our segments and we believe that we are operationally and financially well-positioned for continued solid growth in 2012 and beyond. This concludes our formal presentation, and we'll now open the line for Q&A. Operator?

[Operator Instructions] Your first question comes from the line of Tahira Afzal of KeyBanc.

First question is, you've had -- you're having such a strong finish to the year. As you look into 2013, Jim, what do you see as your key challenges for growth?

Well, Tahira, right now, we're seeing so much momentum. I think it's just -- getting resources is becoming more challenging, even though we are the preferred employer in the industry because we pay the best wage and provide our folks with good equipment to work with. So I think that would be the biggest challenge. I mean, we have momentum in our business. Going forward, the timing of projects is the challenge and the regulatory environment, while it's not as big an issue for us overall because we have so many projects going, trying to determine when a project is going to start, if there's a slippage of a month or 2, it could impact our forecast. But other than that, we're continuing to see momentum going into next year.

Okay, great. And I'll have one more, and then I'll hop back in the queue. If you look on the electric transmission side and we've tallied up several fairly large awards that are still out there, and you're talking about $200 million to $500 million type of projects, from what we can see, that could be awarded over the next 12 months. As you look at that prospect list you kind of mentioned, could you sort of talk a little more about -- provide us a little more color on the drivers of some of these transmission opportunities that you're seeing?

Yes, I mean, there's going to be big project awards, there are big projects in the pipeline, and we're excited about that. But I think one thing that's really not understood is the small transmission market. The regulation that's driving the NERC compliance standards and the coal switching to natural gas, these are all going to be smaller segments of transmission, and that business is very, very active and is going to remain very active, and I believe in a growth mode for quite some time. You look at CREZ, I mean, CREZ is built. It's a big transmission project but you have to think about all the laterals and interconnects that are going to be built off of that. And in total, the amount of money being spent there is far more than what CREZ is. So the small transmission market for projects that we don't typically announce with a day-to-day work is very active, and that's over half of our business. And we expect the big transmission market to be active as well. So it's a really robust time in the transmission business, and I still think we're in the early years of a major transmission buildout.

Your next question comes from the line of Adam Thalhimer of BB&T Capital Markets. Adam R. Thalhimer - BB&T Capital Markets, Research Division: First, Derrick or Jim, can you help me to think about -- your Q4 revenue guidance is up single digits, but your total 12-month backlog, up about 19% in Q3. What's the relationship between 12-month backlog and then revenue over the next couple of quarters?

12-month backlog, overall, I mean, over the next couple of quarters, typically we would just run it about the 65% range as far as backlog as a percentage of revenue, as that relates to '12 and going into '13.

I think the relationship, too, Adam, when you look at the fourth quarter -- I mean, first off, 12-month backlog is the best indicator of our business going forward. It's at record levels, it's strong. So that's an indicator that the next 12 months, we should see growth in our business, although we're not willing to quantify it right now. The fourth quarter guidance, we've got seasonality in the fourth quarter, we've got weather risks, the risk that projects will get pushed into the next period, we've got holidays, we've got this storm going on right now. So we think we can do better, but we're going to shoot the ball down the middle right now and give the guidance that we have. And hopefully we will do better, but we don't want to take a risk because of all of these factors and the fourth quarter being seasonal, primarily because of weather and holidays, that we have an issue hitting guidance. Adam R. Thalhimer - BB&T Capital Markets, Research Division: Okay, that's good. And then, for the second question, I wanted to ask about electric distribution. Jim, have you seen any -- has there been any changes there in demand in Q3? Some of the equipment suppliers saw some deceleration in demand on the distribution side, and utility returns maybe are softening a little bit. Are you seeing any utilities kind of cut distribution here?

No, we haven't. From a comp standpoint, the third quarter in distribution was probably a tough comp at [ph] third quarter '11, but I mean, we're still seeing close to double-digit growth for the year. And really, we haven't seen any slowdown as many of the utilities are spending money on reliability. And that trend continues despite that we're in an election year. So we've been pleased with what we've seen so far, and we expect that trend to continue going forward.

Your next question comes from the line of Alex Rygiel of FBR. Alexander J. Rygiel - FBR Capital Markets & Co., Research Division: Two quick questions. First, you mentioned in your opening remarks that you're seeing your customer base broaden. And one of the strengths of Quanta through the years has been that your customer base had already been very broad. Can you comment a little bit further on that comment in your opening remarks?

Yes, well, I don’t want to give any names, Alex. I mean, I think that the current environment is, for our customers, that they're under more pressure to get projects done on time and underbudget or on budget, and it's very important. And we had more discussions with people that we haven't traditionally worked with in the past, and we believe that there will be opportunities that we'll execute on because we have the capabilities to get their projects done, on time and on budget. And we have the resources to do that. You will see some new customers for certain in '13. Alexander J. Rygiel - FBR Capital Markets & Co., Research Division: Excellent. And then secondly, can we dig a little bit deeper into the pipeline business, excellent quarter, 5.8% operating margin, up nicely from the second quarter. Can you put that into perspective and maybe give us some directional guidance on the mix of long-haul, large diameter versus shale work this year, and possibly, what that mix could look like next year and how it could help or hurt margins?

I would say that for '12, all of our work was shale-related, and we've done very well. I mean, we established a presence about 18 months ago, and from that point, we've built momentum. And we've gotten more volume and better margins because of that. I wouldn't think that a 50-50 mix next year would be out of the question. But that's not going to be 1 plus 1 equal 2, so we're going to have to probably be 1 plus 1 equal 1.5. But we will have some big pipe opportunities next year, and it could be a 50-50 mix potentially, big pipe versus shale work.

Your next question comes from the line of Will Gabrielski of Lazard.

Can you talk about any impact you may have seen as the quarter, Q3, went along in the shales? Did you see any change in activity levels based on what's happening with the rig count or some of the commentary from the EMPs around expensing their or exhausting their capital budgets for this year and maybe waiting until next year to start spending again?

No, Will, we haven't seen that. I mean, these EMP guys that we're dealing with, they're not going to shut rigs down for a quarter and then start back up in January. That's inefficient. I mean, we continue to see the drilling rig count on, particularly on the horizontal rigs in the liquid-rich plays, the count continues to be strong, and we haven't seen any pullback in that activity.

Okay. And then for my follow-up I was just wondering if you could talk about the reliability side of your business, mostly on transmission. I've tried to ask this every quarter just to see how it's tracking, but the enforcement of some of the NERC reliability rules and how that's trending and what the margins are looking like in that work right now?

Well, it's 50% of our transmission business, and it's growing, if not the same, more than what our big transmission business has grown this year. It's significant, and it's going to be here for several years. And our customers are just on the very front end of spending money to comply with NERC reliability standards. And then on top of that, you've got FERC 1000, you've got -- which could impact us in '14 and '15; you've got the coal switching to natural gas projects, which is going to be 30, 60-mile type segment lines that need to be built off of new gas-fired generation that's going to be in the small transmission categories. So we've got a significant amount of opportunities in the small transmission market that's being driven by regulation. And that's going to help pipeline, too, because you're going to have to build gas pipelines, compressor stations, pump stations and all that, so that's going to really support our pipeline business as well. So it's all good stuff, good drivers right now in our business.

Your next question comes from the line of Noelle Dilts of Stifel, Nicolaus. Noelle C. Dilts - Stifel, Nicolaus & Co., Inc., Research Division: I was hoping you could speak a little bit about the opportunities that you're seeing in Canada in terms of both electrical and pipeline and how that compares to the U.S. And I've been hearing that -- we're on the pipeline side, in particular, have been hearing that labor is tight in Canada, so I'm wondering if you're seeing a shift toward negotiation and away from competitive bid in the Canadian market on the pipeline side.

I can just tell you that the same drivers in the U.S. are in Canada today as far as both electric transmission and on pipeline. And it's a very active market, and we're well positioned in Canada from a competitive standpoint to take advantage of those opportunities as they present themselves. Really in almost every province in Canada, there's opportunities. It's the same progress that we see in the U.S. It's just about 18 months behind the activity here in the States. Noelle C. Dilts - Stifel, Nicolaus & Co., Inc., Research Division: And then on the labor side, is there -- is the tightness in labor pools similar to the U.S. or is it a little bit tighter in Canada on pipeline?

I would say it's as tight or if not, tighter in Canada than it is in the U.S. So everyone's going through a skilled labor, both the pipeline industry and the electric industry are going through labor shortfalls right now as the demand continues to increase for the services our customers need.

Your next question comes from the line of Andy Wittmann of Robert W. Baird. Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division: I wanted to just kind of dig into the pricing environment in the electric business specifically and there's a fairly large project that went out this past quarter that -- your name had been circled around. There's probably -- you guys have been kind of a higher quality service provider, and this is a project that I assume that you didn't want to price it at some of those levels that we're seeing in it. Can you just talk about the level of competition on price today, and what maybe your passing on that job means for the rest of the environment that you might be looking at in terms of other projects?

Yes, Andy, you can't take one project and think that, that's going to set pricing for the industry. I mean, it's a very regional dynamic and it also depends upon the size of the line, the scope of the line, what geography, what type of geography we're in. So we're not going to win every job. I'll tell you that our philosophy on pricing hasn't changed, if anything, prices should go up because the demand for our services continues to increase. So I wouldn't read anything into us winning -- not winning a project that everybody had circled for us to win. I just think that you can't do that. The pricing dynamic in the industry still continues to be very strong. Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division: Okay, that's helpful. And then just maybe totally different, but I guess somewhat related also. On the margins, were there any project closeouts in the quarter, Derrick or -- and can you also just quantify the absolute dollars of storm? I know you said $11 million or $16 million more this year than last, but can you just give us the absolute dollar amount for storm?

Sure. The absolute dollar amount for storm for the consolidated basis is about $81 million for the quarter. And then relative to your question about closeouts, I mean, we obviously have starts and stops of all the jobs, but there was nothing material associated with any impacts for the quarter forward for those starts and stops.

Your next question comes from the line of Scott Levine of JPMorgan. Rodney C. Clayton - JP Morgan Chase & Co, Research Division: It's Rodney Clayton here for Scott. First, I want to ask about your Energized Services offering, obviously, you've got a nice award there from AEP, and certainly it looks like that's a service where you have a competitive advantage and what differentiates you from your competition. What's really stopping, I guess, the greater -- the percentage of your customers from adopting this type of approach when they're planning projects, is it just price or is there some other reason why that couldn't become a greater percentage of your business?

Well, I think that Energized Services is going to be more important to our customers going forward. The NERC compliance work is going to be an important driver for that business. When you have 1 transmission line into an area that needs to be upgraded because it's not in compliance and that the customer can't or it's not cost effective to acquire a new right-of-way or take the line out of service because the customers will have interruptions for too long of a period of time, so this is a perfect application in technology that becomes cost-effective at that point to utilize. That's why AEP is using this technology. So again, upgrading this older infrastructure having 1 line in and out of the load center, it gets to the point of right-of-way issues and everything else. It just makes it a lot more cost effective and more efficient for the customer to use this technology going forward. So we're pretty excited about the opportunities we have for Energized Services in the future. Rodney C. Clayton - JP Morgan Chase & Co, Research Division: Okay, got it. Very good. And I guess one more follow-up. I want to ask about Howard Energy Partners, just in general, how is that venture going, and how does your project pipeline look as you get to work in the Eagle Ford shale?

Howard Energy is going along like we expected it to. The investment is giving us opportunities. The Eagle Ford is very early in development. And we are seeing engineering and construction opportunities, not only in the Eagle Ford, but in other areas because we've leveraged our relationship with Howard to do work in the Marcellus as well and in the Bakken. So we've been very pleased with that relationship and that investment, and we expect more opportunities to come out in the future as the Eagle Ford, in particular, becomes more active.

Your next question comes from the line of Zach Larkin of Stephens Inc.

This is Chris Godby in for Zach. With 2 quarters of profitability in gas with that large diameter work, do you have a sense for what the operating margin profile of the segment could be just on shale work alone?

Well, we've said we should be in the mid- to upper single-digit operating income on shale gathering work alone. And we've been moving toward that target over the last several quarters. If we were to bring in some big pipe into that mix, some large diameter pipe, we should be able to move into that 9% to 12% operating income range.

Okay, great. And then, thinking about electric transmission, have there been any changes in approval timelines given the regulatory environment or elections?

No, everything has moved according to plan over the last -- since the last quarter, we haven't had any delays to speak of. Nothing meaningful.

Your next question comes from the line of Ahmar Zaman of Piper Jaffray.

A couple of questions just on the impact of Hurricane Sandy. I know you made some comments in your prepared statements. First question is, how much pre-prep were you able to do getting -- going into Hurricane Sandy, and how will that affect kind of minimizing the damage to your activities that were in the past? And then secondly, the repair work that you'll probably get because of Hurricane Sandy, how should we think about the margin profile of that work versus your -- basically the margin mix between repair work and existing projects that were impacted by Hurricane Sandy is what I'm trying to get at.

A hurricane is a little bit different than a tornado or an ice storm, we get a little bit of pre-notice, so we did have almost a week to prepare and batten down and secure our equipment in the core services that we provide in the area. So hopefully, we'll be okay there. I mean, we haven't been able to go in and completely assess the situation to date. We were also, at the same time, able to move a significant amount of resources in and pre-position those resources prior to the storm arriving so that we can have an expedient response to the storm damage that occurred. So in both cases, both from our core business and helping respond, too, to repair the damage, we had some ability to move in and do what we could before the storm arrived. As far as the margin profile, I don't even think we need to go there right now. I mean, certainly storm margins do come in at a higher margin, but are these resources coming off existing work we're doing for those utilities we're responding to? Are they coming in from Canada or the West Coast? And then what ultimately is the impact, negative impact, to our core business in the area? So it's just too early to tell what kind of margin impact we're going to have at this time. But certainly, by our fourth quarter call, we'll be able to give more color around that.

Your next question comes from the line of Dan Mannes of Avondale.

A couple of follow-up questions. I think most of my questions have been asked and answered, but real quick on the pipeline side. We were pretty pleased to see the backlog pick up sequentially. Can you talk a little bit about maybe the bidding environment on the shale side, and maybe just help me out a little bit with understanding the seasonality of the business because it looks like it's run [ph] a lot less seasonality than maybe we've seen before?

There is less seasonality even though I don’t want to discount the fourth quarter weather seasonality. There's seasonality in the amount of work that you do, and there's seasonality due to weather. The work's steady right now. The fourth quarter is very active because our customers are still trying to get infrastructure in place and there's no let up. With that said, that means that you're really moving with one customer from project to project to project, so you're really working on a negotiated basis. They don't have time to go out and do an RFP on every project, and they certainly don’t want to deal with the new foreman and workforce every time they bid out a new job. So they're very comfortable with their working relationship with us. We've been working for 6 to 8 of the same customers and just going from project to project to project, and the work is steady and we don’t see any see any let up on that work going forward. If anything, it's increasing.

Sounds good. And then, just one quick other topic that you guys haven't talked much about. But you mentioned on Puget Sound, obviously you've kind of outsourced their gas LDC operations. Are you seeing opportunities either for more deals like that or alternatively, just more opportunities for gas LDC retrofit work, especially given some of the regs coming down from FIMSA [ph] there and certainly what happened in California?

Yes, certainly, we think there are more opportunities to do outsourcing work and program management on reliability of projects that are being driven by FIMSA [ph] regulations. There are opportunities, that's one of the biggest areas I think that we have, working off a smaller base, of course, but that's one of the biggest areas of growth for us, as the integrity and the pipeline rehabilitation work that is going to occur throughout the country. There's a role to be a program manager in many of those, and certainly some outsourcing opportunities are possible.

Your next question comes from the line of Jamie Cook of Credit Suisse.

This is actually Andrew Buscaglia on behalf of Jamie. Just a quick question. It's regarding your customers' visibility, I know we have -- the elections should be kind of like a lift for that. But I'm just curious what you guys are hearing. I mean, it looks like your guidance says that things are getting better for your customers, and just curious what they're saying on the remainder of the year and 2013, just any update there.

Yes, I mean, our customers -- the spending is there. I mean, we've got significant pipeline of opportunities and backlog going into '13. So there doesn't seem to be any pull back from our customers on capital spending in either the electric -- or electric, pipeline or Telecommunications markets right now in our customer base. Things look to be very active going into '13.

Okay. And then just an update on capital allocation relatively -- specifically, if you can comment on M&A, what your updated views are, if any?

Sure. I mean, capital allocation, first, is the -- obviously, a working capital to support the business, but you can see this going on here versus the second and third quarter type of cash demands. Second, capital expenditures. And then third, to investments and acquisitions. We did about 10 acquisitions over the last year to 1.5 years now, and we've continue to be active in the -- and opportunistic in that area. As it stands right now, we don't really comment to future acquisitions and the timing of when and how large and whether they will occur. But we've continued to be active and opportunistic.

Your next question comes from the line of John Rogers of D.A. Davidson. John Rogers - D.A. Davidson & Co., Research Division: The -- if we could just go back to the DSOs for a second. I know that in the past, seasonally, they've come down the fourth quarter. But it sounds like there were some timing issues this quarter, and then -- can you just talk about how quickly those are going to drop back down or what the collection cycle is on those?

Sure. Your -- I would agree that, I mean, typically, DSOs do decline in the fourth quarter because of the seasonality as revenues also drop. But particularly in this fourth quarter, I think it's pretty difficult. The storm work that Jim alluded to is an example. We're uncertain as to yet as to the type of volume that may occur from that and the timing of what that would be and how long. And so, that could be a pretty big draw of cash. Secondly, as I made reference to the Sunrise change order as an example, the timing of the collection of that, we're striving to achieve the collection before the end of the year, but as to whether that occurs by 12/31 or into the following quarters, a little bit difficult to say. I would say that we, overall, expect we'll have a strong free cash flow in the near term. It's just difficult to say whether that will occur by the 12/31 timeframe or not. John Rogers - D.A. Davidson & Co., Research Division: Okay. And then just my other question was, I guess for Jim, in terms of the large diameter work, there's a lot of projects on the table. But are they going to bid this season, meaning, I guess late fourth quarter, first quarter or some of the big projects that we're seeing in the press, are they late or end 2012 or 2013, sorry?

I think the bidding season is modified somewhat during this time. I think that you really don't have a bidding season right now. I think it's just -- it's on an ongoing basis. And it really -- you may not have projects go to a formal RFP. It may be just a negotiation process because some of these projects are so big and our customers are concerned about capacity. So I wouldn't be focused so much on a bidding season on big pipe this year. I think it's going to be a different dynamic, not to say that it won't moderate back to a bidding season at some point in time. I do think -- we do think these programs get built, whether it's in the latter part of '13, the mid of '13, the latter part of '13 or into '14, a lot of that's going to do to the regulatory environment and when these projects get approved, these liquid lines [ph] get approved. But it's going to be a very robust market. You can see the capital spending going into the refinery space, and the EMPs really aren't letting up on drilling these wells and building this gathering infrastructure. So the next logical step is to build these pipelines, and we do see visibility and traction online to getting plans [ph] moving toward construction in the -- over the next year or 2.

Your next question comes from the line of David Gusick [ph] of Wedbush Securities.

You mentioned earlier about an expectation for dark fiber acceleration going forward. Could you talk a bit more about that?

Sure. I mean, last year, we had capital expenditures in dark fiber, of about $17 million, and this year, we have CapEx in the segment of about $45 million. And so, what we believe will happen as Jim alluded to that the pick up in sales K-12 has been a little bit down because of the economy, and that's picked back up in some of the double-digit sales that you see. And we think that will turn back into revenues in backlog in the future as we end up delivering on those networks.

And also, it looks like you had substantial Telecom bookings in the quarter. That appears to be accelerating. Can you talk a bit more about that going forward as well?

Yes. I mean, I think what you're seeing is that we're in the height of the stimulus buildout right now, and we think that our business will continue, the Telecom construction activity will continue at high levels through the better part of 2013. But the significant portion of what you're seeing is stimulus buildout that's occurring due to customers in underserved areas.

Your next question comes from the line of Martin Malloy of Johnson Rice. Martin W. Malloy - Johnson Rice & Company, L.L.C., Research Division: On the pipeline side, could you talk a little bit about your market share in terms of spreads of equipment for large diameter pipelines in North America?

Yes. I mean, I think what we've been saying is we've got about 1/3 of industry capacity to do large diameter pipeline across the U.S. So it's about 1/3. Martin W. Malloy - Johnson Rice & Company, L.L.C., Research Division: Okay. And in terms of levels of activity, and -- do you think you can come back to the '06, '08 timeframe?

I think it's possible. I think it depends upon how compressed a construction cycle we have, how many customers are we going to be [indiscernible] are going to be building pipe for at one time, or does it get spread over a 3 to 4-year period. It's going to be a very active market. Can it reach '08 levels? Yes, but that's yet to be determined as to whether that will happen or not.

Your next question comes from the line of Steven Fisher of UBS.

Wondering if you can talk about your staffing and presence in the various shales. Are you guys ramped up to where you want to be in the specific shales? And if not, which basins do you think you need to add the most incremental resources to be the most competitive?

Well, I think, the Marcellus was the first shale that really was developed and we've been there for 18 months, and certainly, we're doing a lot of work there. But we've got a presence there now, so we're well-positioned to take on additional customers if we're able to do so. The same goes for the Eagle Ford and the Bakken, which are younger shales as far as development, but opportunities will present themselves there as well. And then you start talking about new shales that haven't even really been developed yet, like the Utica, the Niobrara, the Granite Wash, the Mississippi, and it goes on and on. So it's a life cycle, but we will continue to build our presence in the shale and take advantage of those opportunities. And we should see growth over the next several years, building out gathering for some work.

And ladies and gentlemen, this does conclude the question-and-answer session. I will now turn the conference over to management for some closing remarks.

I'd like to thank you all for participating in our third quarter 2012 conference call. We appreciate your questions and your ongoing interest in Quanta Services. Thank you. This concludes our call.

And thank you. Ladies and gentlemen, this does conclude the conference call for today. This conference will be available for replay later this afternoon until November 7, 2012 at midnight. You may access the replay at area code (303) 590-3030 and enter access code 4572253. Again, this does conclude the conference call for today. We thank you for your participation. And you may now disconnect your line.